Berkshire Hathaway

Berkshire Hathaway is a holding corporation based in Omaha in Nebraska (the center of the United States). It carries out underwriting and investment operations through about 200 American and foreign companies.

This mega-corporation has developed its operations in various economic sectors ranging from insurance and reinsurance to food industry, finance, energy, textile, transport, press, services, retail sales, ... It also has a stock portfolio worth tens of billions of USD, with considerable shares in big multinationals such as American Express and Coca-Cola.

Berkshire Hathaway, it is in 2008:

  • 80 activities, developed through approximately 200 companies
  • Assets worth 267.4 billion USD
  • Shares worth 49 billion USD, invested in important companies
  • 60 insurance and reinsurance companies
  • Insurance premiums amounting to 58.5 billion USD
  • Revenues amounting to 107.8 billion USD
  • Net profits of 4.99 billion USD
  • 246 083 employees

The major shareholding of Berkshire as at 31/12/2008

in millions USD
 Shares in %Market value*
Washington Post (press)
18.4674
American Express (finance)
13.12 812
Kraft Foods (food)
8.93 498
Coca Cola (food)
8.69 054
Wells Fargo (finance)
7.28 973
Conco Phillips (oil)
5.74 398
Posco (iron and steel industry)
5.21 191
US Bancorp (banking)
4.31 879
Swiss Re (reinsurance)
3.2530
Procter & Gamble (cosmetics and hygienic products)
3.15 684
Tesco PLC (retail)
2.91 193
Sanofi-Aventis (pharmaceutical industry)
1.71 404
Johnson & Johnson (health and hygienic industry)
1.11 795
Wal-Mart Stores (large scale distribution)
0.51 118
Other shares
16.14 870
Total
100 49 073
* Market value as at 31/12/2008

A success story

Initially, Berkshire Hathaway was a small textile company. It was set up in 1950 following the merger between Hathaway Manufacturing Company and Berkshire Fine Spinning Associates.
In 1962, the American investor Warren Buffett showed interest in the company from which he purchased shares at the rate of 7.5 USD then ended up acquiring the entire capital in 1965. He gradually winded up the textile activity and turned the company into an investment fund whose share value amounted to 140 000 USD in 2008.

Warren Buffet; Omaha's wise citizen

Photo credit: US Gov. / Pete SouzaBerkshire Hathaway is chaired by its builder Warren Buffett who holds approximately 38% stakes. Renowned for his wise decisions, he has been behind the performance achieved by the holding during the four recent decades.
Born in Omaha on August 30, 1930, son of a stock market broker, he pursued his studies at Nebraska university and obtained a Master's degree in economics from the Business School of Columbia.
He started his professional career in 1954 working for Benjamin Graham's investment company “The Graham Newman” in New York. Then, he decided to go back to his native town to work as a broker in his father's company.

Strongly determined to pursue his career in the finance sector, Buffett set up in 1956 his first investment company, followed by others which he pooled up into the “Buffett Partnership Limited”. So he started to run stock market portfolios making use of the money collected from his friends and relatives, thus, making capital gains amounting to 30% a year in market where the average performance is set between 7 and 10%.
By purchasing Berkshire Hathaway in 1962, he closed down all his former companies to focus his attention on his last acquisition which he converted into an investment fund.

As he wished, Warren Buffett earns an annual salary of 100 000 USD from Berkshire Hathaway and receives no dividends.
Now, he is the world's second wealthiest man according to the 2009 ranking of Forbes magazine with a fortune estimated at 40 billion USD by April 2009. Almost all of his wealth, that is, 99% shall be given away to charities after his death.

The investment strategy

Warren Buffett's investment principles remained unchanged since the start of his career. They rest on:
  • The purchase of depreciated securities
  • The acquisition of creeping or under-rated companies, having, however, a strong growth potential in the long run
  • The investment in activities easy to understand, avoiding especially high technology companies
  • The maintaining of shares on the long-term basis
  • Maintaining leaders who performed well in the company
Such a cautious strategy has not kept the group from suffering an unexpected setback in 2008 and during the first quarter of 2009.

The impact of the financial downturn on Berkshire

The crisis has decidedly spared no one, not even the Omaha oracle: Warren Buffett. His conglomerate has been seriously hit hard by the international recession. The group's 2008 results, followed by those of the 2009 first quarter have displayed heavy losses as a result of the particularly costly investments and the errors of judgment in a context characterized by the general weakness of the American economy. Consequently, the group's security has lost 39% of its value in 2008 while operating profit dwindled down by 12% during the first quarter of 2009 after the 62% decline between 2007 and 2008. Net losses amount to 1.5 billion USD in the first quarter 2009.

Warren Buffet is the world's second wealthiest man according to the 2009 ranking of Forbes magazine with a fortune estimated at 40 billion USD by April 2009.

These losses have tarnished the group's image which has already suffered a decrease of its rating by the two agencies, Fitch and Moody's.
The default risk rating has gone down a notch at AA- by Fitch while Moody's has downgraded the holding two rungs. Standard & Poor's has, on its part, maintained its maximum rating but assigned to the group a negative outlook.

The insurance sector

Since he started as an investor, Warren Buffet has always had a finger in insurance. His investments in the insurance sector date back to 1967 when he acquired his first insurance company, the National Indemnity, followed a little later by GEICO. Very quickly, insurance and reinsurance have become the driving force of the Berkshire system which is a permanent generator of liquidity. Consequently, the premiums collected from insurance and reinsurance operations are reinvested in other sectors: either in stock market securities or in the purchase of companies.
At the end of 2008, the motor insurer GEICO and the reinsurer General Re have earned Berkshire premiums worth 58.5 billion USD.

Four groups are sharing the activity: GEICO, General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group.

The group's insurance and reinsurance companies

About 60 of the group's companies are operating in the insurance sector. They offer several direct insurance and reinsurance products in some classes such as: property, life, accidents and health.
Four groups are sharing the activity: GEICO, third insurer in the United States, General Re and Berkshire Hathaway Reinsurance Group, two of the world's biggest reinsurers and Berkshire Hathaway Primary Group.

  • GEICO (Government Employees Insurance Company) is the main motor insurer in the United States. Set up in the 1930s by Leo Godwin, GEICO is one of the most ancient assets of Berkshire's portfolio. Since 1976, the group has regularly invested in the company's capital until its takeover in 1995.
    By the end of 2008, GEICO controlled 7.7% of the American motor insurance market and insures over 15 million vehicles.
    GEICO owns several subsidiaries, some of which is GEICO General, GEICO Indemnity and GEICO Casualty. It runs a vast distribution network built around the direct sale (through the branches, telephone, internet, mail,...), thus, covering the 49 American states and the District of Columbia.
    GEICO results' 2006-2008
    in millions USD
     200620072008Growth 2007-2008
    Written premiums
    11 30311 93112 7416%
    Earned premiums
    11 05511 80612 4795%
    Pre-tax profits
    1 3141 113916-17%
  • General Re: World's fourth reinsurer and first American reinsurer, General Re underwrites treaties and facultative reinsurance in the property, accident, life and health classes of business.
    All of its capital, 22 billion USD, has been acquired in one move by Berkshire Hathaway in 1998: the biggest takeover ever achieved by the holding company.

    General Re gathers several companies including:

    • General Reinsurance Corporation: Based in the United States, the company directly covers the North American non-life market.
    • Cologne Re: Established in Germany, Kolnische Ruckversiecherungs-Gesellschaft AG (Cologne Re) reinsures the international life and non-life markets. It underwrites business either directly or via brokers.

    General Re is represented at the international level in all important reinsurance markets thanks to a global network involving 50 offices in 25 countries.

    General Re's results 2006-2008
    in millions USD
     200620072008
     Written premiumsEarned premiumsPre-tax profitsWritten premiumsEarned premiumsPre-tax profitsWritten premiumsEarned premiumsPre-tax profits
    Non life
    3 5813 7113753 4783 6144753 3833 434163
    Life
    2 3682 3641532 4792 462802 5882 580179
    Total
    5 949 6 075 526 5 957 6 076 555 5 971 6 014 342
  • Berkshire Hathaway Reinsurance Group: This reinsurer has specialized in the most hazardous challenges; it underwrites the natural catastrophes mega risks, the “super-cats”, such as hurricanes, earthquakes as well as risks that other reinsurers avoid.
    Berkshire Hathaway Reinsurance Group Results' 2006-2008
    in millions USD
     200620072008Growth 2007-2008
    Earned premiums
    4 97611 9025 082-57%
    Pre-tax profits
    1 6581 4271 324-7%
  • Berkshire Hathaway Primary Group: It is a direct insurer which comprises a large variety of companies, benefiting from a managerial autonomy. The group underwrites insurance contracts in the property, and personal accident classes of business.
    Berkshire Hathaway Primary group comprises the following insurers: Medical Protective Corporation “MedPro”, National Indemnity Company's primary group “NICO Primary Group”, US Investment Corporation, Homestate Companies, Central States Indemnity Company, Applied Underwriters and Boat U.S.
    Berkshire Hathaway Primary Group results' 2006-2008
    in millions USD
     200620072008Growth 2007-2008
    Earned premiums
    1 8581 9991 950-2%
    Pre-tax profits
    340279210-24%

Underwriting results of the overall insurance companies 2006-2008

in millions USD

 200620072008Growth 2007-2008
Written premiums
24 77731 29726 797-14%
Earned premiums
23 96431 78325 525-19%
Profit (before tax)
3 8383 3742 792-17%
• GEICO
1 3141 113916-17%
• General Re
526555342-38%
• B.H. Reinsurance Group
1 6581 4271 324-7%
• B.H. Primary Group
340279210-24%
Net profit
2 4852 1841 805-17%
Investment income
3 1203 5103 497-0,4%
Written premiums' breakdown by region in 2006-2008

in millions USD

 200620072008Growth 2007-2008
Life
United States
1 0731 0921 119-
Western Europe
628706749-
Rest of the world
667681720-
Total
2 368 2 479 2 588 -
Non life
United States
19 19518 58919 267-
Western Europe
2 5769 6414 145-
Reste du monde
638588797-
Total
22 409 28 818 24 209 -
Total
United States
20 26819 68120 3863%
Western Europe
3 20410 3474 894-52%
Rest of the world
1 3051 2691 51719%
Total
24 777 31 297 26 797 -14%
Berkshire Hathaway's employees' breakdown by insurance company
 Employees
GEICO
22 249
General Re
2 574
Berkshire Hathaway Homestate Companies
627
Berkshire Hathaway Reinsurance Group
593
United States Liability Insurance Group
513
Central States Indemnity Co
431
Medical Protective Corporation
422
National Indemnity Primary Group
384
Boat America Corporation
377
Kansas Bankers Surety Company
18
Total insurance28 188
Total other sectors
217 895
Total of overall activities 246 083
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